Tesla Motors - Executing According To Plan

Shares of Tesla Motors (NASDAQ:TSLA) witnessed a large sell-off in after-hours trading. While the company roughly met analyst expectations, investors are used to big earnings and revenue beats nowadays. The lack of such a beat triggered a sell-off after the closing bell.

While the stock could go anywhere in the short term, I remain a long term fan of the company and I believe shorts have the riskiest position in the long term.

Third Quarter Results

Tesla released its third quarter shareholder letter, as the company likes to call it. The company generated revenues of $431.3 million, up significantly from revenues of just $50.1 million being generated last year. Note that growth compared to the second quarter came in at 6.5%.

Note that R&D expenses fell in absolute amounts, falling from $61.9 million to $56.4 million. Despite the fall in expenses, Tesla increased attention and focus on the Model X. Selling, general and administrative expenses were on the rise significantly, especially compared to the second quarter.

All in all, GAAP net losses came in at $38.5 million. While this looks favorable to a huge $110.8 million loss reported last year, it increased from the $30.2 million loss reported over the second quarter. GAAP losses came in at $0.32 per share, while analysts were looking for losses of $0.25 per share.

Looking Into The Results

For the third quarter Tesla made a record of 5,500 deliveries of which a 1,000 in Europe. Production came in at 550 cars per week, with production exceeding deliveries to fill the pipeline for vehicles in transit towards Europe, for service purposes as well as marketing usage.

Non-GAAP revenues, which exclude the effect of lease accounting, rose by 9% on a quarterly basis to $603 million. Note that ZEV credit revenue fell to just $10 million over the past quarter, compared to $51 million in the second quarter. Excluding ZEV revenue, growth was 18% on a sequential basis.

Note that the huge positive gap between non-GAAP and GAAP revenues implies that revenues are still increasing rapidly, as lease accounting requires the company to recognize cars being sold through lease programs over time, in this case three years.

Note that on a non-GAAP basis, Tesla reported earnings of $16 million, or $0.12 per share, beating consensus estimates by a penny.

And Other Operational developments

North America and Europe demand remains strong, as Tesla aims to make the first deliveries into China in the first quarter of next year. As service centers even appear to drive sales, the global retail and service location base has increased by 20% over the past quarter to over a 100 locations.

With over 90% of customers opting for supercharge capabilities Tesla has a network of 31 stations in the US and 6 in Norway. By the end of 2014, most of Western Europe should live within a 320km range from a super station, as Tesla is aggressively expanding its charger network.

Outlook

Production and deliveries of Model S vehicles for the quarter is seen at 6,000 vehicles, resulting in annual deliveries of 21,500 for the year. Non-GAAP gross margins excluding ZEV credits are seen around 25%, according to plan.

R&D expenses are expected to increase by a quarter on the back of acceleration of Model X and Model S enhancements. SG&A expenses are seen up by a fifth in order to grow retail stores, service locations and Supercharger facilities.

Valuation

Tesla ended the quarter with $796 million in cash and equivalents. Total debt, including convertible debt stands at $660 million, for a modest net cash position of around $136 million. Note that due to the lease accounting other liabilities are entering the balance sheet as well. "Other liabilities" stood at $213 million, mainly the result of resale value guarantees for the Model S cars.

Revenues for the first nine months of the year came in at $1.40 billion, up from merely $107 million a year earlier. GAAP net losses narrowed significantly from $306 million to $58 million. At this pace GAAP revenues of $1.9 billion should be attainable combined with modest GAAP losses.

Factoring in losses of 12% in after-hours trading, with shares trading at $155 per share, the market values Tesla at $18.8 billion. This values the firm around 10 times annual revenues.

Some Historical Perspective

After being a somewhat boring stock for 2011 and 2012, in which shares have mostly traded in a $20-$40 trading range, shares have seen spectacular gains in anticipation of the first quarter earnings report and the strong momentum following.

After breaking out of the $40 resistance level in April, shares quickly rose to peak at nearly $200 per share at the end of September. Ever since, they have given up nearly a quarter of their value, when factoring in the after-hours declines.

Investment Thesis

The bad news is also the good news in this report. Tesla remains production constrained, not demand constrained, according to Elon Musk. The 19,000 Model S cars being on the road have driven a combined more than a 100 million miles. This creates new demand for Tesla, enabling it to not advertise, not offer discounts or come up with paid endorsements.

At the current base, Tesla is generating $1.9 billion in annualized revenues or $2.4 billion on a non-GAAP basis. The true revenues, when truly accounting for lease revenues and potential warranties will come in somewhere between this number. With an anticipated demand of 40,000 cars by the end of next year, Tesla could nearly double those revenues to come up with GAAP revenues of $4 billion and non-GAP revenues of $5 billion. Applying operating margins of 25% to these revenue numbers, and you can see the potential.

For now the short term earnings outlook continues to be bleak, as fourth quarter earnings are seen around those levels in the third quarter. This is as Tesla is increasing capacity and building infrastructure.

Still, it is understandable that investors are a bit disappointed as they have gotten used to big beats from Musk and his colleagues. With the stock trading around $155 per share in after-hours trading, shares are back to where they were trading three months ago.

At the time when Tesla reported its second quarter earnings results, on the 8th of August, I last took a look at the company's prospects.

I concluded that the long term prospects continue to look good driven by Musk's target of 40,000 annual deliveries of the Model S by the end of next year, as the Model X and Sedan move ahead in the pipeline.

The good thing is that Tesla used the strong momentum in its share price to fortify the balance sheet, as ZEV credits are essentially already falling to zero at the moment. Given the continued ramp up in production and services, earnings will be limited and a little extra cash might come in handy.

The stock could go anywhere in the short term, but the long term prospects remain good despite a nearly $20 billion valuation. The outstanding product, quality, service and continued hype makes Tesla a very dangerous short for the long term, while I cannot assure it will be great investment going forwards.

With shares back to where they were three months ago, the biggest short term momentum has faded. Yet the future remains a guess. While I am not holding a position, if I would have to pick, I would chose to initiate a long term long position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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